Wednesday, October 21, 2009

A temporary shock, a permanent bias

Courtesy reader sf, I find that the Tom and Tom show has made another appearance before a legislative panel.

State Economist Tom Stinson told the Subcommittee on a Balanced Budget � part of the Legislative Commission on Planning and Fiscal Policy � that tax collections for the first quarter of Fiscal Year 2010 (the state�s fiscal year begins July 1) came in below the original forecast by $52 million, or approximately 1.7 percent. ...

Stinson said Minnesota will likely begin the 2012-13 biennium with a budget deficit of at least $4.4 billion; however, House Chief Fiscal Analyst Bill Marx said the true number could be as high as $7.2 billion, once inflation and the impacts of Gov. Tim Pawlenty�s 2009 unallotments and vetoes are factored in.

Beyond 2013, Stinson said long-term demographic trends will reduce the state�s tax revenue base. In particular, he said the state�s aging population will create a situation where revenue growth will decrease just as demand for government services is going up.

�The demographics are going to make tax increases more difficult,� Stinson added, explaining that Baby Boomers trying to save money for retirement will likely resist proposals to raise taxes.

State Demographer Tom Gillaspy said the Baby Boomers will also require more state health care spending as they get older, making it more difficult to fund education and other government services. He suggested the key to getting out of this �fiscal trap� would be to increase the productivity of the state�s workforce. Stinson noted that this in turn requires new public investments, like infrastructure and education, creating what he called a �fiscal Catch-22.�

The latest edition of the Tom and Tom presentation is here. It has been a staple on the St. Paul fiscal policy circuit for about three years now. But the recession has changed how they present this, and I'd like to suggest it's lead them to one positive statement or forecast that is contentious and one normative statement that I think we should question.

To see the positive, let's look at a graph in the presentation (at page 9.)This is a representation of the Global Insights forecast for nominal GDP at two different points in time. Nominal GDP is a driver of the revenue model Department of Finance uses to project tax receipts. If you forecast nominal GDP to be lower, your tax revenues will go down, and your budget deficit looks higher, all other things equal. Dept. of Finance uses Global Insights' forecast.

They project a permanent decline from the recession. A textbook description of recessions, however, would not normally show a permanent shock to GDP from its trend values. This would normally be the result of a negative productivity shock. But has that happened? Multifactor productivity in the US rose 1.2% in 2008. Why would we not get a period of above-average growth? Real earnings are up. Casey Mulligan has sounded this theme for awhile, and it's plausible -- not that it's beyond debate, just that it's a real possibility that there has been no permanent shock, and that nominal GDP can return to its previous path. That would imply that the Minnesota budget deficit for 2012-13 is possibly not nearly as bad as predicted by Tom & Tom.

Their final slide includes this statement, emphasis added:

If we don�t make the necessary public investments in human capital, research and infrastructure, then we won�t have the productivity gains needed to provide the resources to make those investments.

I would hope that's a misprint, or a hasty slide. (Given it's the last one, quite possible.) Human capital formation does not require public investment. I buy my child a private education. A private university raises funds to permit faculty time to create new basic research. Infrastructure has both private and public components -- and more of it could be private if we made that choice. There is nothing necessary about "public investments" other than a lack of imagination of what the private market could do if permitted.

Nobody spends somebody else's money as carefully as he spends his own. Nobody has the same dedication to achieving somebody else's objectives that he displays when he pursues his own.

Beyond this, the programs have a insidious effect on the moral fiber of both the people who administer the programs and the people who are supposedly benefiting from it. For the people who administer it, it instills in them a feeling of almost Godlike power. For the people who are supposedly benefiting it instills a feeling of childlike dependence. Their capacity for personal decision making atrophies. The result is that the programs involved are misuse of money, they do not achieve the objectives which it was their intention to achieve. But far more important than this, they tend to rot away the very fabric that holds a decent society together.

"a feeling of childlike dependence" -- from your trash service to your college to your health care.